2020 is without doubt a year that will be remembered for having presented
more than its fair share of challenges and there is still more than 3
months to go! Whilst private equity sponsors attention was focussed on
their existing portfolio assets in response to the immediate economic
turmoil generated by the COVID-19 pandemic, as the clouds are now appearing
to lift, attention is starting to focus on investment opportunities in the
"new normal".
With these themes in mind, it is worth considering how taxation has
developed this year – with a number of new issues to consider in deal
making, some of which are often overlooked. These issues are outlined as
follows:
Control and trading trusts
With respect to fund level issues, the ATO's published but unfinalized
position on control and trading trusts is still creating an inherent degree
of uncertainty for the industry. The Legal and Tax Committee of the Australian Investment Council have been engaged with the ATO and have made several industry specific
submissions addressing key concerns with the ATO's position. It is hoped
that the ATO position will be finalised in the near term.
Transaction structuring
The ATO has continued to flag its concerns regarding the use of debt,
particularly in cross border transactions with a number of guidance
publications on this subject over the last 18 months. For transactors, the
taxation outcomes of any proposed capital structure is relevant on all
deals, and is brought into specific regulatory focus where FIRB approval is
required.
An emerging area of concern for transaction structuring is the use of CGT
roll-overs, particularly in multiple step transactions. There are several
reviews currently underway, the outcomes and recommendations of which
should be monitored.
Landholder duty
Often overlooked by private equity sponsors during transactions is the
potential application of landholder duty. Recent changes to stamp duty
rules in a number of jurisdictions have expanded the duty payable on
acquisitions of 50%+ interests in companies beyond “traditional” land
owning companies to apply to operating or services companies.
Now, where a company or unit trust (directly or via subsidiaries) holds
interests in fixtures or items fixed to land (e.g. office fit-out or plant
and equipment), landholder duty may also be payable. The general threshold
value of these items before duty is payable starts at $1 million. Revenue
Offices are focused on enforcing these provisions.
Given duty is often payable shortly after a transaction completes, it is
critical that funding of it is secured upfront.
Tax due diligence
Tax due diligence remains relevant and understanding the reasons for the
effective tax rate of a target should be on the to do list of any
transaction planning. Outside the usual areas of tax diligence
consideration, some emerging areas of focus in tax due diligence in short
to medium term should be:
§ consideration of the eligibility of an investment's historical R&D
tax offsets by focussing on how eligible activities have been substantiated
and the quality of supporting documentation;
§ assessing whether JobKeeper claims have been properly made given that the
ATO has indicated this will be a significant area of focus in the small to
medium enterprise market; and
§ ensuring employment taxes are been complied with, particularly where
workforces are casual or structured as independent contractors. The risks
here can surprisingly become a material item in a short period of time.
Demergers – new opportunities for PE?
Recent ATO guidance on demergers has cast doubt on the ability to carry out
demergers in several instances, particularly where such a demerger is to be
accompanied by an acquisition or a capital raising. By limiting the
circumstances in which the ATO will confer demerger relief, corporates may
be forced to turn to other transaction forms to generate shareholder value.
In doing so, this may well open the door to new investment opportunities
for private equity suitors.
The takeaway
As we enter the final quarter of 2020, the clearer picture of the 'new
normal' continues to emerge. Private equity is uniquely positioned to
successfully emerge from the turmoil – with record levels of capital ready
for deployment. Those sponsors who operate with awareness of the tax issues
at fund level, transaction level and at a portfolio level will be best
placed to secure that success.
If you are interested in any of the themes and issues covered by this brief
article please contact the author for a no obligation discussion on how
they relate to your firm.