Tax due diligence crucial for M&A deals, Grant Thornton warns
The firm has cautioned businesses delving into merger and acquisition transactions to conduct due diligence on associated tax obligations and risks.
Grant Thornton has underlined the importance of understanding the tax risks of merger and acquisition (M&A) deals and the mechanisms that can be applied to address these risks.
According to the firm, it was crucial for all businesses to effectively comprehend the ambiguity of tax law and the improbability of addressing all tax law obligations as no business was without tax risk.
Grant Thornton tax practitioner Mark Trewhella recommended that businesses effectively grapple tax risks by undertaking the tax due diligence process.
Trewhella said the tax due diligence process aimed to determine whether tax risk embedded within a target was acceptable given the buyer's risk appetite, and how to rectify tax issues identified.
“Tax due diligence involves a tailored review of a target’s adherence to tax lodgements, payment of tax liabilities, and the way tax is addressed within a business.”
“Importantly, it equips a buyer with a comprehensive understanding of the tax history they will inherit when acquiring a business.”
It was noted a due diligence exercise would usually cover a four-year period based on the Tax Office review period of tax-related matters being up to four years.
Tax due diligence would usually encompass corporate income tax, GST, employment taxes such as superannuation and payroll tax, R&D, customs and stamp duty.
Areas often scrutinised during the tax due diligence process included substantiation for major transactions, tax consolidation and mining expenditure.
Other key areas often scrutinised included tax losses, government stimulus incentives, superannuation, payroll tax and international taxes.
Tax losses and international taxes were often scrutinised by the ATO, however, all businesses were unique regarding what would be examined in more detail.
“The rationale behind the historical use of tax losses should be evidenced, as this is an area that is often scrutinised by the ATO,” he said.
“Consideration should also be given to the availability of unused tax losses, particularly where the vendor is claiming that the losses may have value to the buyer and, therefore, should be considered as part of the deal consideration.”
Trewhella said risks should not be taken as dealbreakers and there were several mechanisms to address tax risks while continuing with a deal’s progression.
Mechanisms that could be used to tackle identified tax risks included, renegotiation of purchase price or embedded adjustment mechanism, rectification of error, pre-transaction advice, indemnities and warranties, escrow accounts and alternative transaction structures.
Trewhella said conducting thorough tax due diligence not only protected the buyer but also enhanced confidence among stakeholders of the buyer.
“Parties looking to undertake tax due diligence should seek a tax adviser with experience in the industry of the target, enabling a sound understanding of any industry-specific issues.”
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