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Australia: Deductible liabilities in M&A transactions

Australia: Deductible liabilities in M&A transactions

Taxpayers purchasing a business or assets and assuming deductible liabilities related to the assets need to consider a draft tax determination issued by the Australian Taxation Office (ATO).


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The draft tax determination—TD 2019/D11 (30 October 2019))—confirms the position of the ATO that any deductible liabilities that are assumed by the purchaser of an asset in merger and acquisition (M&A) type transactions are not included in the cost basis of the asset for capital gains tax purposes.

KPMG observation

This latest of ATO draft tax determinations is consistent with the acquisition-of-subsidiary situations under tax consolidations; 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 calculation when joining a tax consolidated group.

The change in law was intended to address concerns of potential double benefits arising when the head company obtains both the uplifted allocable cost amount from the deductible liability (that translates to additional depreciation of capital gains tax cost base) and also a tax deduction when the relevant expense is incurred.

ATO draft taxation determination 2019/D11

TD 2019/D11 provides if an asset subject to capital gains tax is acquired from another entity and that asset is subject to a liability, the liability does not form part of the cost base to the extent that has been deducted or can be deducted from the 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). If the cost is in the form of the obligation, the acquirer assumes it on acquiring 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 greater.

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

Read a November 2019 report prepared by the KPMG member firm in Australia

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