BALDWINS • FoodLegal

Australian Lawyers and Consultants

Shares or Units: Buyer Beware

December 2001

More business buying opportunities are surfacing as a result of either: divestment by larger companies, cut backs in the high-tech sector, vendors’ liquidity problems caused by poor investment external to the core business, or lack of a family succession. Baldwins has been involved in more acquisitions and joint venture transactions over the past few months on this score.

Some vendors are attracted to a sale of shares or units because of perceived CGT advantages.

Yet, where businesses have operated at a loss, there are additional precautions required for those contemplating buying the business structure (purchase of the shares or units). Careful due diligence investigations must be made of actual and contingent liabilities and querying whether the anticipated tax benefits of carried forward tax losses will pass with the purchase.

Importantly, if there are liabilities to outside creditors, the company remains liable notwithstanding the change of ownership.

If a business has operated at a loss, the losses typically would have been funded by additional loan facilities from a related entity - reflected by a loan account in favour of that related entity. Any purchaser should consider how to allocate the price between the value of the loan account being acquired and the value of the shares/ units. Care should be taken to avoid generating a future unwanted tax liability caused by an inappropriate allocation.

Although losses belong to the entity which has made those losses, the tax laws deny the carrying forward of the losses for future use in a range of circumstances. For example, losses can be denied if:

1. the business ceases to be of the ‘same business’ character as previously carried on (the test of ‘same business’ can be quite tough);
2. complex tax provisions affecting trusts that have incurred revenue tax losses or bad debts (schedule 2F of the ITAA 1936) can deny losses of trusts or even the loss of a trading company that has a discretionary trust as a shareholder unless various steps are taken;
3. the ‘debt forgiveness’ rules can reduce the amount of the carried forward tax loss even though the intention may have been merely to protect the company from future claims by creditors;
4. tax losses that appear in the accounts may have been transferred to other entities in the corporate group;
5. some tax losses resulting from overseas activities might possibly be subject to quarantining against future overseas income (s79D); or
6. tax losses resulting from tax deductible claims that are vulnerable to denial under tax law, may not be available. A distinction must also be drawn between revenue losses and capital losses as the tax distinction is significant having regard to the different tax rules applicable to capital gains as against ordinary assessable income.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

Return to the Corporations Law Archive or Australian Tax Law Archive.