Post Covid-19 economy inspiring increased M&A activity – SME sector at the forefront

Dennis Tomaras, a partner in eastern seaboard law firm, Cornwalls, believes that Covid-19 is inspiring a wave of merger and acquisition activity in Australia.

 

‘It’s probably 50 / 50 between those businesses looking to merge for survival reasons and those seizing the initiative in difficult times to acquire a competitor, supplier or even a key client in some cases’ says Tomaras.

 

He believes that current M&A activity is most pronounced with privately owned SME’s – across all sectors, but especially in technology, agricultural, services and manufacturing.

 

‘Now that Australian business has recovered over the initial shock of Covid-19, SME’s are learning to live with the virus and trying to make the most of it, by considering M&A opportunities’ says Tomaras.

 

As a Tax adviser, Tomaras believes that there are four main structuring considerations in any M&A deal.  These are as follows.

 

1. Buying shares or assets in the target company.  Tomaras says that there are numerous pros and cons of each and no two M&A deals are ever quite the same.  However, vendors typically prefer selling their shares and buyers typically prefer acquiring assets.  As a general rule, Australia’s Capital Gains Tax laws tend to favour a sale of shares for the sellers creating a degree of tension between the interests of the buyer and the seller.  

 

However, the GST and state tax implications of the deal should also be considered by the parties.

 

2. Are the entities ready for an M&A deal?  Tomaras believes the biggest mistake business makes is that they are underprepared for an M&A deal.  ‘You wouldn’t sell your house without making sure it’s ready for inspection and it’s the same in a business deal’ says Tomaras.  Acquirers and target entities need to make sure their legal and financial affairs are up to date and that all federal and state tax returns are in order. 

 

Buyers often conduct due diligence on the seller too as they want to know their business and staff are going to be in good hands.  A good idea he says is to get the company advisers to undertake a high-level health check of the business before any M&A activities commence.  Directors of companies also need to be aware that they may be personally liable for certain past tax liabilities of a target company.

 

3. Effect on tax losses of the deal.  Australia’s income tax laws contain detailed rules as to the usage of company tax losses.  Tax losses – whether of a revenue or a capital nature – can be valuable assets to a buyer of a company.  Typically, the so called ‘continuity of ownership’ test will be failed on an acquisition of the target company. 

 

Even though the ‘continuity of business’ test is available regarding the future use of the losses, this is a more difficult test to satisfy and care is required in what business improvements and changes in personnel are made in the target company, says Tomaras.

 

4. The allocation of consideration over the assets acquired.  One of the most contentious issues, particularly on a future ATO audit, is the allocation of consideration against the assets acquired.  This is an area of interest both to business and taxation authorities alike as for example, tax depreciation is based on the acquisition cost of an asset. 

 

Likewise, there may be different tax outcomes for both GST and state taxes based on the allocation of consideration to the assets acquired.  Tomaras recommends involving a qualified valuer to contemporaneously opine on how consideration has been allocated across assets, so as to avoid future disputes with taxation authorities.

 

The bottom line says Tomaras is that as M&A activities increase, both buyers and sellers need to be ready for a deal and need to do their homework across a range of revenue law and other relevant issues.    

 

ENDS

 

Issued by Cornwalls   w: Cornwalls.com.au

 

Media enquiries:    Mr Joe Perri, Joe Perri & Associates

Mobile: +61 412 112 545 Email: jperri@joeperri.com.au

 

 

About Dennis Tomaras Throughout the years Dennis has garnered extensive and diverse experience in the taxation and revenue law field, prior to joining Cornwalls as a Partner. 

 

Dennis provides practical and commercially focused taxation planning and structuring advice for privately owned businesses and Australian public companies. He assists with mergers and acquisitions, and appropriate business structures including transformation from one structure to another. In addition, Dennis advises on international tax planning for inbound and outbound investments, restructures or disposals.

 

Dennis’ expertise also entails developing appropriate tax strategies for businesses, including managing and resolving taxation disputes with Australian federal and state taxation authorities.

 

He also advises boards and business owners on strategic issues and growth opportunities, including assessing possible acquisitions and new business ventures, and expenditure reviews. 

 

Dennis enjoys his role as a regular commentator on business issues on radio station 3AW.