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ATO guidance: Deductible liabilities in mergers and acquisitions

Deductible liabilities in mergers and acquisitions

If you are purchasing a business or assets and there are deductible liabilities being assumed by the purchaser, you need to consider the Australian Taxation Office’s (ATO) new draft ruling, TD 2019/D11 released on 30 October 2019.

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The ATO’s view in TD 2019/D11 confirms that any deductible liabilities that are assumed by the purchaser of an asset, are not included in the CGT cost base of the asset. This latest draft ruling is consistent with the acquisition of subsidiary scenarios under tax consolidation.  Here the law was amended in 2018 so that any deductible liabilities of a subsidiary are not included in the Step 2 entry allocable cost amount (ACA) calculation when joining a tax consolidated group. This change in law was to address concerns of potential double benefits arising where the head company obtains both the uplifted ACA from the deductible liability (that translates to additional depreciation of CGT cost base) and also a tax deduction when the relevant expense is incurred.

Similarly, in TD 2019/D11, the ATO states that if you acquire a CGT asset from another entity and that asset is subject to a liability, that liability does not form part of the cost base to the extent that you have deducted or can deduct your expenditure in discharging that liability.  Otherwise, the first element of the cost base would generally include the amount of the assumed liability under section 112-35 of the Income Tax Assessment Act 1997 (ITAA 97).  The cost is in the form of the obligation the acquirer assumes when it acquires the asset. In the absence of the encumbrance, whether secured or unsecured, the purchase price and therefore the money paid or required to be paid, would have been higher.

The ATO states that in principle, an item of expenditure should either be deductible for income tax purposes or included in the cost base of an underlying asset for CGT purposes, but not both.

For exploration of some of the practical issues arising from TD 2010/D11, please log on to KPMG Tax Now.

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