Amalgamations
The amalgamating company ceases to exist on the companies register, but the rights and obligations of the amalgamating company continue to exist in the form of the amalgamated company for income tax purposes.
The amalgamating company shares are disposed of at cost with no gain or loss being recognised. They must be cancelled without payment or other consideration.
The amalgamated company is treated as having acquired the property on the date the amalgamating company acquired the property with the same cost base.
Depreciable property will be transferred with depreciation being accounted for in the amalgamating company until the date of amalgamation.
An easy way to check is by depreciating the asset for the whole year, and then apportioning it to the pre and post amalgamation entities accordingly.
Non-concessionary amalgamations of property can result in taxable gains or losses for the amalgamating company.
When the companies are associated, the transfer will be based on the market value.
The amalgamated company must use the lower of the market value or the cost price from the amalgamating company. They also cannot use a greater depreciation rate than was already being used.
Financial Arrangements
Generally the amalgamated company will step into the shoes of the amalgamating company for third party financial arrangements. This results in the amalgamated company acting as if they had entered into the arrangement, so there will be no base price adjustment (BPA) on amalgamation.
The conditions that need to be met for this to occur are:
- They were part of the same wholly owned group for the whole income year prior to amalgamation.
- The amalgamated company uses the same method of calculating income and expenditure for the financial arrangement (spreading method) as the amalgamating company.
- The amalgamating company does not have losses carried forward from an earlier year that could not be attributed to the amalgamated company.
If the amalgamating company and amalgamated company were not in a wholly owned group of companies before the amalgamation, and using the same spreading method, a BPA will need to be performed.
Where a financial arrangement (FA) is between companies involved in the amalgamation, the financial arrangement ceases to exist.
Where the borrower is able to meet their obligations of the FA, there will be no income under the FA rules to the borrower for the unpaid amount.
If the borrower is insolvent and unlikely to have met its obligations under the financial arrangement, the financial arrangement is deemed to be discharged immediately before the amalgamation for the market value of the financial arrangement on the date of amalgamation.
In general, this means that remission income will arise to the borrower if the value of the financial arrangement has declined. Generally, the lender cannot claim a deduction for the amount remitted.
They may be able to claim a bad debt deduction for the non-principal portion.
No debt remission income arises when a debt is remitted within a New Zealand resident wholly owned group of companies.
The debtor is treated as having paid, and the creditor is treated as having been paid, the amount of the financial arrangement on the amalgamation date. This applies to both concessionary and non-concessionary amalgamations.
Imputation credit account (ICA)
On a concessionary amalgamation, imputation credits and debits of an amalgamating company are treated as if they were recorded in the ICA of the amalgamated company with effect from the original credit and debit dates.
To carry forward imputation credits of an amalgamating company, there must be at least 66% continuity of shareholding from the date that the credit arose until the amalgamated company uses it.
On a non-concessionary amalgamation, an amalgamating company’s imputation credits are extinguished.
Provisional tax
An amalgamating company adds their prior year residual income tax to the amalgamated companies residual tax to determine if the amalgamated company will be a provisional taxpayer (currently over $5,000). This is also used to work out the amount required to be paid for upcoming provisional tax dates.
Fringe benefit tax
An amalgamating company that ceases to exist on amalgamation must file a fringe benefit tax (FBT) return to the date of amalgamation. The de minimis threshold for unclassified benefits and the threshold for paying FBT on an income basis are apportioned under the amalgamation rules.
The apportionment is based on the actual days in the quarter, or 365 days per year, depending on the FBT basis being used.
GST
No GST implications arise where an amalgamating company supplies any goods or services to the amalgamated company on amalgamation, provided that either of the following conditions is met:
- the amalgamated company is registered or liable to be registered for GST immediately after the amalgamation; or
- the amalgamating company is not registered or liable to be registered for GST immediately before the amalgamation.
If both conditions described above are not met, the amalgamating company is deemed to have supplied any goods and services to the amalgamated company at their market value at the date of amalgamation.
For mixed-use assets where the use of the goods changes at a later date, the GST adjustment required is calculated as if the amalgamated company acquired the goods at the same time and for the same cost and purpose as the amalgamating company originally did.
GST, FBT and entertainment expenditure
An amalgamating company that has provided fringe benefits or incurred entertainment expenditure in the period before amalgamation is deemed to have made a supply after amalgamation.
The supply is deemed to be made by the amalgamated company and the time of supply will be the earlier of the date the amalgamating company files its tax return, or the date by which it must file its tax return.
Administrative matters
The amalgamated company must give notice of the amalgamation to the Commissioner within 63 working days of:
- delivering the amalgamation documents to the Registrar of Companies (or the equivalent procedure if the amalgamation occurs under foreign law); or
- In the case of an amalgamation of building societies, registering the notice of the transfer of all engagements.
The amalgamated company notifies the Commissioner of an amalgamation by filing a Declaration of an amalgamation – IR 432.
The above writing should not be relied on as being factually correct in any way whatsoever.
The above information is based on an IRD draft consultation which is for comment and discussion (PUB00457).
Leave a Reply
You must be logged in to post a comment.