As businesses expand, a common decision is whether to create new companies to accommodate new ventures, risks, products and/or acquisitions. A well-designed group structure enables a ‘parent’ company to create distinct entities that operate independently. This approach has several benefits – it provides flexibility as it allows control and visibility over each entity’s direction, policies, financial performance, and strategic decisions. But like children, companies are easy to make, but costly to maintain, as they can lead to increased operational complexity, volume of transactions and making coordination across multiple entities difficult.
This creates a cost versus benefit question that may lead to the decision to reduce the number of companies in a group through amalgamation. This may seem daunting or a hassle, but in most situations, an amalgamation is an elegant solution. Under an amalgamation, the assets and liabilities of one or more companies are assumed by a continuing company.
From a tax perspective, if an amalgamation qualifies as a resident’s restricted amalgamation, there is typically no tax cost. This is because a rollover approach generally applies, where the assets and liabilities (including current and historical tax liabilities and obligations) of the amalgamating company will generally be assumed by the amalgamated company at their tax book values. For example, depreciable assets of the amalgamating company are assumed by the amalgamated company at their tax book values. Taxable income should also not be triggered on trading stock (i.e. inventory) because it is deemed to be transferred at the amalgamating company’s original value.
To qualify as a resident’s restricted amalgamation, the participating companies must comply with the following:
- be New Zealand tax resident;
- are not treated under a double taxation arrangement as a tax resident in another jurisdiction;
- not be companies that derive only tax-exempt income; and
- are not qualifying companies.
Inland Revenue has recently concluded a feedback process on a new interpretation statement that will be issued on the amalgamation provisions. At first glance, the draft document (namely, “PUB00457”) suggests the applicable legislation and tax consequences are complex. However, a detailed examination reinforces the concessionary treatment that generally applies.
That being said, there are a few fishhooks to be aware of. For example, if a company has tax losses that are unable to be offset against the profits of all amalgamating companies due to commonality requirements not being met, the tax losses will be forfeited.
There are also some administrative elements to work through. For example, a notice of amalgamation should be filed with Inland Revenue (IR 432 form) within 63 working days of lodging the amalgamation documents with the Companies Office.
Even though completion of an amalgamation will likely require the help of legal advisors and accountants, it provides an effective way to rationalise the number of companies in a group without triggering a tax payment to Inland Revenue.
