Tax Updates: 23 September 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at [email protected].

Company amalgamations – all you need to know

If you presently deal with company amalgamations, or you’re simply a sponge just wanting to learn as much related to the world of tax as you can, then these latest three docs recently issued by Inland Revenue (IR) may be just for you.

The three documents are referenced and titled PUB00457/A: “Income tax and GST — amalgamations”, PUB00457/B: “How does an amalgamated company calculate its available subscribed capital following an amalgamation?”, and PUB00457/C: “Tax treatment of losses on amalgamation”. You can find all three documents here.

The first and third documents are circa 40 pages each, with the Available Subscribed Capital (ASC) document 12 pages long.

If you are short on time (aren’t we all), then my recommendation would be to focus on the income tax and GST document. It’s a good starting document in any event, certainly, if you are new to company amalgamations and may not understand therefore the concepts of the amalgamating company versus the amalgamated company, what is a concessionary amalgamation versus a non-concessionary one, and what is a resident’s restricted amalgamation.

Within the Income Tax Act 2007, the core amalgamation rules are contained within subpart FO, and the commentary within PUB00457/A commences with a table that briefly summarises the core provisions from section FO 4 to FO 18 – subject covered, comments, and whether the referenced section applies to concessionary amalgamations, non-concessionary amalgamations or all amalgamations.

I expect that most of you will be involved with the short-form amalgamation process, which can be used in an upwards amalgamation process (amalgamating companies are a parent company and wholly-owned subsidiary), or a horizontal amalgamation (amalgamating companies are wholly owned by the same person). This being the case, you will need to follow the process set out in section 222 of the Companies Act 1993.

A resident’s restricted amalgamation (basically one where all companies involved are New Zealand residents and not treated as residents in another country under an applicable Double Tax Agreement) enables a concessionary amalgamation to proceed, which by its very name suggests that this type of amalgamation obtains concessions from an income tax perspective, which a non-concessionary amalgamation obviously will not receive.

In broad principle, under a concessionary amalgamation:

• the amalgamated company acquires most assets of the amalgamating companies at their tax book value;

• the amalgamated company inherits the tax losses and imputation credits of the amalgamating companies if continuity and commonality tests are met; and,

• the amalgamating companies do not derive income or incur a loss.

Post an initial summary of the amalgamation rules, PUB00457/A goes through each of the sections referenced in the table I referred to earlier, providing some general guidance surrounding the purpose and effect of the provision. There are numerous examples throughout the document to illustrate the commentary.

Having read through 49 pages, if you’ve now lost the will to live and cannot face the next 40-page document, which provides guidance surrounding the tax treatment of losses on amalgamation, then a basic concept you just need to understand is this. If absent an amalgamation process, one of the companies involved in the amalgamation would not have been entitled to carry a loss balance forward, or offset a loss balance with another group member (so, in other words, would not have satisfied either the continuity tests or the commonality test), then any loss balances existing as at the amalgamation date are likely to be forfeited. So, to avoid any doubt here, the amalgamation rules do not allow a company to carry forward losses that would otherwise be lost, or share its tax losses with a company that it would not otherwise be able to. Unless the amalgamated company is incorporated on the amalgamation date therefore, just check whether all the amalgamating companies have been part of the same 66% group of companies from the date the tax losses were initially incurred. If so, then likely the tax loss balance will survive post-amalgamation.

Understand the basic concept, and you’ve just saved yourself 40 pages of reading. However, you may want to understand a little deeper what happens to the tax losses of an amalgamating company and then to the tax losses of an amalgamated company, which will require you to at least read a few pages of the doc.

The final document in the series, PUB00457/B (okay, I acknowledge I’m not being alphabetically correct here), is really a Questions We’ve Been Asked, which answers how the amalgamated company calculates its available subscribed capital following an amalgamation. The question is important from the perspective of an eventual liquidation of the amalgamated company, where available subscribed capital balances can be returned to shareholders tax-free. Since the document is only 12 pages (with a fair portion of that taken up by legislative extracts and examples), I’ll leave you to read the content – probably only useful if you’re actually dealing with an amalgamation at the time.

If you would like to submit a comment with respect to either of the three draft documents, the closing date for submissions is the 1^st of November 2024.  

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.