Are you a tech company owner in Australia looking to sell your business through a merger or acquisition (M&A) transaction? Congratulations on reaching this exciting milestone!
Before you embark on your M&A journey, it's essential to consider an often-overlooked aspect: tax planning.
While taxes may not be the most thrilling topic, they play a vital role in shaping the success of your M&A strategy. Failing to address tax concerns can have significant implications for the value and structure of your transaction. In this article, we will explore essential tax planning tips specifically tailored to tech company owners pursuing M&A exit strategies in Australia. By incorporating these tips, you can ensure a smooth and financially rewarding M&A experience.
1. Resolve Historical Income Tax Liabilities and any Compliance Weaknesses
As you prepare for an M&A transaction, it's crucial to identify and address any historical income tax liabilities your tech company may have and ensure your compliance is up to date. Tax liabilities can arise from various sources, such as underpaid or unpaid taxes, incorrect tax returns, tax audits or disputes, transfer pricing adjustments, or from failing to properly capture and remit employee related obligations.
Failing to resolve these liabilities beforehand can negatively impact the net proceeds for the seller, increase risk for the buyer, or trigger indemnity claims under the sale agreement.
2. Optimise Presale Tax Structuring
Reviewing and optimising your tech company's existing tax structure is another critical step. Depending on the nature and size of the M&A transaction, you may want to consider restructuring your company to achieve specific objectives. This could involve simplifying the group structure, separating business lines or assets, consolidating or eliminating intercompany transactions, or aligning the tax profile with commercial value drivers. It may also involve ensuring the ownership of the company’s intellectual property (IP) is legal and beneficially owned by the sale group.
By strategically structuring your taxes before the sale, you can enhance the attractiveness of your tech company to potential buyers, minimise tax leakage during or after the transaction, and maximise tax benefits for yourself as the seller.
3. Quantify Your Company's Tax Attributes
When preparing for an M&A transaction, it's essential to quantify and document your tech company's tax attributes. These attributes include any carried forward tax losses, capital losses, franking credits, foreign tax credits, research and development (R&D) incentives, and capital allowances. Understanding these attributes is crucial because they can impact the value of your company and the structure of the transaction. For example all of the following attributes could have value pre or post the transaction:
- Carried forward tax losses may be able to be used to offset future taxable income of the buyer post-acquisition
- Franking credits can potentially be distributed as dividends to shareholders prior to sale
- Carried forward R&D offsets can reduce taxable income
- Capital allowances can decrease future taxable income of the buyer.
4. Navigate Capital Gains Tax (CGT) Liabilities
Capital gains tax is a significant consideration in any M&A transaction. CGT applies to the capital gain or loss resulting from the disposal of a CGT asset, which includes shares, units in trusts, or intangible assets associated with a business. The amount of CGT payable depends on factors such as the cost base, sale proceeds, residency status, and applicable CGT concessions or rollovers and will depend on the structuring of the transaction.
Australian residents are generally subject to CGT on their worldwide capital gains at their marginal tax rate, while non-residents are subject to CGT on Australian-sourced capital gains at a flat rate. Understanding and planning for CGT implications is essential for optimizing your M&A exit strategy.
6. Manage Stamp Duty Costs:
Transfer duty, or stamp duty, as its commonly referred to, is a state or territory tax that applies to various types of transactions, including the transfer of, business assets, IP, real property or shares and units (especially where an entity holds real property). The rate of duty varies between states and territories, and exemptions or concessions may apply to certain types of transactions. It's important to factor in stamp duty costs when structuring your M&A transaction and consider potential exemptions or concessions that could help minimise these costs.
7. Protect R&D Tax & Government Incentives:
Prior to pursuing an M&A exit strategy, claimants of the R&D Tax Incentive (R&DTI) in Australia should ensure that their R&D project documentation is up to date. All R&DTI claimants should maintain on file, a copy of their R&DTI Applications as registered with AusIndustry, a copy of their R&D Tax Schedules as lodged with their income tax return for the period and all supporting documentation, including expenditure workpapers, invoices, contracts, timesheets, and other contemporaneous documentation as evidence of the activities undertaken.
It is important that claimants understand that the R&DTI is a self-assessed program, and in some instances involving contentious areas of R&D, including software R&D, it could be beneficial to have an independent review of past R&D claims prior to commencing a due diligence process with a potential buyer so that there are no rude surprises with regards to the eligibility your R&D claims. A savvy, potential buyer of a business that has claimed R&D in the past, would be interested in understanding their risk, considering R&D claims can pose a liability on a company if the claims are later found to be non-compliant with R&D Tax Incentive legislation.
While you may receive a registration number from AusIndustry, your claim can still be reviewed for up to four years after the end of the income year or last income year to which the R&D activities relate. Ensuring you have adequate documentation in support of the R&D activities claimed over the past four years is an easy way in which you can prepare yourself for the due diligence process and for a potential review by the regulators if one was ever initiated, and maximise the value of your business.
8. Manage Transaction Costs
M&A transactions often involve various costs, such as legal fees, accounting fees, due diligence costs, valuation fees, and advisory fees. These costs can have tax implications, including deductibility, timing of deductions, and GST (Goods and Services Tax) considerations. It's essential to manage these transaction costs efficiently, ensuring they are appropriately allocated and claimed to optimise your tax position.
9. Mitigate Employee Obligation Risks
Employee obligations and related taxes are becoming a significant focus for due diligence reviews, including superannuation, PAYG withholdings and state payroll tax. One area that is particularly relevant to tech companies is the correct classification of employees, where independent contractors or ‘gig workers’ are common. Misclassifying employees as independent contractors, and failing to meet required employee obligations can lead to significant tax liabilities, penalties, and legal disputes.
Before finalising your M&A transaction, it's crucial to review your employee classification practices and ensure compliance with the applicable tax and employment laws.
As a tech company owner pursuing an M&A exit strategy in Australia, proactive tax planning is key to optimising your transaction and maximising your returns. By carefully considering and addressing the tax issues discussed in this article, you can minimise risks, enhance the value of your business, and ensure a smooth and financially advantageous M&A experience.
Remember, consulting with experienced tax professionals specialising in M&A transactions can provide valuable guidance and support throughout the process. Good luck with your M&A journey!