Buying A Business With Tax Losses
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Buying A Business With Tax Losses
Companies in business rescue often have built-up assessed losses for tax purposes. Competitors wishing to take over the business of the company in business rescue would often view such assessed loss as a valuable asset, in addition to other valuable assets that the distressed company may have.
Several earlier cases dealt with the interpretation of section 103 of the ITA and stated inter alia that section 103(2) should be construed in such a way that it will advance the remedy provided by the section and supress the mischief against which the section is directed. The courts have held that the section and the discretionary powers conferred upon the South African Revenue Service (SARS) should not be restricted unnecessarily by interpretation and that the legislature clearly intended to discourage the wilful acquisition of juristic entities for the sole purpose of setting off previously assessed tax losses against profits.
There are a number of reasons a business may be experiencing tax losses. For instance, there is a current trend of acquiring technology companies. Most companies in this sector have for many years sustained tax losses while investing in and developing their core offerings and intellectual property. If not managed properly, acquiring a company with tax losses can be fraught with challenges. If the target entity has significant carried forward tax losses, the vendor can sometimes have an expectation that the purchaser should be able to obtain the tax benefit attributable to the losses in the future. Therefore, there can be an assertion that the purchase price should be adjusted so that the vendor is paid for the future tax benefit that will accrue to the purchaser when the losses are recouped.
Most businesses must file and pay federal taxes on any income earned or received during the year. Partnerships, however, file an annual information return but don't pay income taxes. Instead, each partner reports their share of the partnership's profits or losses on their individual tax return.
You must pay federal tax on income that is not subject to withholding. Or if the amount of your federal income tax being withheld is not enough to cover the taxes you owe, you must pay an estimated tax. Find out if your business has to pay estimated taxes and the steps to follow.
Prior to the introduction of the TLCF rules, a New Zealand company with tax losses would forfeit its tax losses where there was a change in the ultimate shareholders of more than 49%. In practice, this meant that most corporate acquisitions, including an offshore corporate acquisition of a group with New Zealand subsidiaries, would result in a complete forfeiture of New Zealand tax losses.
The new TLCF rules have been introduced as a pro-business initiative and to enable a purchaser of a New Zealand company to be able to use tax losses following an acquisition and offset those tax losses against future taxable profits.
What constitutes a 'major change' requires a factual assessment of the business carried on, including the type or category of product or service provided, before the ownership change compared with the period in which the tax losses are used. Recent draft guidance from New Zealand Inland Revenue has provided useful examples of how the BCT will be applied and what will constitute a major change. Examples include a bakery that changes the types of products it sells, and a bookstore that transforms into a bookstore and café. In most cases, the guidance confirms that these types of examples will not be regarded as a major change.
Second, the loss company must not have become dormant in the period before the change in ownership. This limitation is largely aimed at preventing a company with no value being acquired purely for its tax losses.
Fourth, there is a specific limitation directed at a company that makes pre-emptive changes to its business before the change in ownership. The concern here is that a compa