The Long Term Effect of Australia’s Accelerated Depreciation Concessions on M&A Transactions

The Government has implemented a number of measures in the last couple of years to help businesses navigate the challenges of the economic impact of COVID-19. All with the hope that the concessional tax treatments assist in boosting spending and revitalising the economy. 

Among the series of measures were legislated accelerated depreciation concessions introduced (or amended) under the:

• Temporary Full Expensing (TFE);
• Instant Asset Write Off (IAWO); and 
• Backing Business Investment (BBI) measures.

Yes, these concessions were beneficial in assisting with cash flow and reduced tax liabilities. But this was just the short term. The long term effects aren't as great.

Now, businesses need to be wary of these concessions' consequential effect if they ever want to sell their business.

The same can be said for businesses looking to acquire another. Due diligence for the use and effect of these tax concessions is critical because it could affect the purchase price or similar considerations.

In some cases, it could even determine whether it's feasible to progress with a proposed transaction or implement a more optimal transaction structure. 

What does this mean for M&A transactions?

Where a target entity is bought and becomes a subsidiary member of an income tax consolidated group, special rules in the Income Tax Assessment Act 1997 (ITAA) apply.

More specifically, they apply where the target entity had taken on the TFE, BBI and/or IAWO concessions in working out assets' decline in value prior to the acquisition. 

These special ITAA rules modify the tax cost setting principles to effectively reduce the affected asset's tax cost setting amount to its terminating value. 

This applies even where the tax cost setting amount would otherwise have been higher. 

It's important to note that the reduction amount is not reallocated to other assets, and it's not possible to account for a 'step-up' for the tax cost of the affected asset..

What do we recommend?

It's understandable that many businesses (including yours) would want to use one of the TFE, BBI and/or IAWO concessions.

But, though we agree that they sound appealing, if you're in the process of selling your business (or contemplating a potential sale), we recommend taking a moment to think.

You'll benefit from assessing these measures and whether the extent of their utilisation would have a detrimental impact on the sale of your business.

What if I'm part of an income tax consolidated group?

If you're currently part of an income tax consolidated group and are planning to acquire a new business, we recommend:

• The due diligence process includes consideration of whether the target has utilised these measures historically;
• Where use has been confirmed, further work is required to assess the financial impact of this for your business post-acquisition; 
• Considering whether there are mechanisms to structure the transaction (for example, an asset purchase instead of a share purchase) to minimise detrimental impacts.