Publish Date

Mar 05, 2024

Successful Deal Integration – Putting Tax at the Centre

Australia Bulletin

The deal has just completed. Everyone is high fiving one another. The deal team can scour the web for their deal toy, enjoy a well-earned break or move onto the next project. The finance team, however, isn’t so lucky…

After months of burning the midnight oil responding to information requests, feeding into completion accounts and assisting with other urgent sell-side matters, there is no reprieve. Instead, waiting on the other side of completion is a suite of implementation matters, including reporting on a complex transaction and accompanying valuation and tax outcomes. This is all on top of the “day job” of the finance team, which is usually exhausted and overstretched even before this point in time!

So, what is the key to a successful integration for a finance team? How is success measured and achieved?

It is widely accepted that tax can make or break a deal. Therefore, it should also be no surprise that tax can make or break a successful deal integration process.

Tax is a key interdependency to many important implementation outcomes for finance functions, including valuations, reporting and technology. Finance functions should therefore ensure that their tax teams are set up for success for implementation projects, and that they are seeking expert advice to navigate the challenges and capitalise on the opportunities in front of them. Here is how putting tax at the centre of these processes can set up your transaction for success.

Following a transaction, valuations are required for various accounting and tax outcomes including purchase price accounting (“PPA”), stamp duty and the allocable cost amount calculation (“ACA”, the tax equivalent of purchase price accounting). Therefore, valuations should not be done in a vacuum which is fit for only one such purpose.

For example, higher valuations of certain assets may result in additional tax deductions as a result of the ACA process. This same valuation could result in higher stamp duty payable as well as potentially create an impairment risk in the consolidated accounts.

Businesses can also encounter “square peg, round hole” issues when trying to use the same valuations for tax and accounting. For example:

accounting may require stock to be valued at the lower of cost and net realisable value, whilst for tax there may be a cash tax benefit of using a different method of valuation.

classifications of intangible assets differ for tax and accounting purposes. Specifically, assets which may be depreciable for tax (i.e. copyright) may not be easily identifiable from other intangibles in the valuations prepared for the PPA and assets which are required to be amortised for accounting purposes may not be tax depreciable.

the tax classification of assets can impact Day One deferred tax liabilities. This can result in flow-on effects for the calculation of goodwill in the consolidated accounts.

We recommend that tax is involved in valuation discussions to ensure that shareholder value is maximised whilst no adverse consequences are inadvertently triggered.

Whilst you may be breathing a (well-earned) sigh of relief at the conclusion of a transaction, you should be aware that the clock has started on a long tail of reporting and lodgement obligations (e.g. Australian Tax Office (ATO) notifications, stamp duty lodgements, etc). Some of these can be due within a month! Quality integration governance is the key to ensuring that all deadlines are managed in the post transaction environment.

You might be thinking, do I really care if I’m late with a filing? Won’t there be a grace period if we have just completed a transaction? Quite the opposite… In some cases, the risk profile of your organisation may increase if, as a result of the transaction, you are now classified as a Significant Global Entity (“SGE”) – late filings for SGEs can be up to $782,500. The size of your Australian operations will often not be determinative of your SGE status; rather, it will be based on your ownership structure. It is important following a deal to quickly identify the impact of your new ownership structure on your risk profile and reporting obligations.

Transactions may include complex tax outcomes which need to be reported in financial statements. Deal literate tax accounting is therefore essential to:

Reduce noise in company earnings via large return to provision adjustments.

Demonstrate good governance and reduce tax authority scrutiny.

Reflect deal outcomes, including the risks identified at due diligence. Diligence risks identified should be remediated as soon as possible post-deal. Tax teams should ensure any such risks are appropriately reported, mitigated and managed in line with governance frameworks.

It’s no surprise that integration of reporting systems following a transaction is often a headache for the finance team responsible. However, it’s also an opportunity to re-think how “fit for purpose” the existing system is, particularly when it comes to tax. For example, how much data manipulation is required on the outputs of the enterprise resource planning (“ERP”) system to get to a business activity statement (“BAS”) or a tax chart of accounts? The answer is usually too much, which creates both inefficiency and risk.

Technology should also be harnessed to ensure that all deal attributes flow through to the acquirer to the fullest extent possible. For example, any increased tax cost base of fixed assets should be pushed down into the underlying fixed asset register. Data analytics can help ensure effective lives are optimised for tax purposes and other cash tax savings opportunities are availed e.g. via historic goods and services tax (“GST”) reviews.

The integration period is the time to re-think existing processes and technology to ensure that transformation and value creation occur.

How can A&M help:
At A&M, we have a bespoke team of tax merger integration specialists. Our team spends 100 percent of our time helping finance and tax functions integrate transactions. They know the best practices in the market and can help support your team based on your resourcing needs. This could be an entire tax function outsource for the integration period or the provision of advice to supplement your existing tax team whilst they juggle the many moving parts of an integration project. A&M’s approach puts governance at the centre and ensures that the approach to integration has exit, auditor and tax authority readiness front of mind. As A&M is not an audit firm, it is free from conflict and can assist across the entire spectrum of integration. This extends beyond tax to valuations, ESG, operations and more.

Relatable Insights
Changes to UK Thin Capitalisation Guidance
Borrowing trends and the overall economic environment have undergone notable changes, prompting the UK tax authority (HMRC) to set out guidance for Tax Inspectors when selecting cases for audit