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Mergers and acquisitions

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A new CCE with a new ABN created as a result of a merger or acquisition, that satisfies the requirements to be a reporting entity in its first income year, will need to report in its second income year. This is because its first income year will be its ‘most recent income year’.

A CCE involved in a merger or acquisition that continues with an existing ABN, may be required to report if it meets the eligibility requirements (i.e. the scheme’s income and activity tests). The entity may meet these requirements in its own right or as a member entity of a controlling corporation.

An entity that ceases to exist because of an acquisition by or merger with another entity, will cease to be a reporting entity. As such, it will no longer be required to report.

Example 1: Acquisition of an entity that continues to trade  

Entity X recorded a total income of $110 million on 31 December. Entity Z recorded a total income of $150 million on 31 December. Both entities have standard financial years (i.e. 1 July – 30 June).

Entity X was acquired by Entity Z on 1 January and continues to trade. Entity Z is the controlling corporation.

At the end of the financial year (i.e. 30 June), Entity Z recorded a total income of $300 million. Entity X recorded a total income of $50 million. This relates to the period after it was acquired by Entity Z.

Both Entity Z and Entity X are reporting entities. This is because the combined total income of the group was greater than $100 million. Entity X also has a member entity total income of greater than $10 million. They will need to submit a Payment times report for 1 January – 30 June.

Example 2: Entity ceases to exist after a merger

Entity X had a total income of $110 million in its most recent income year. Entity Z had a total income of $500 million in its most recent income year.

Entity X was acquired by Entity Z before the end of its most recent income year. Entity X ceases to exist under its existing ABN and will now only trade as Entity Z.

Entity X will no longer be required to submit a Payment times report as it has ceased to be an entity. Because Entity X will no longer exist as an entity it is not a reporting entity. It is also not required to apply to the Regulator to cease being a reporting entity.

As Entity Z will continue to trade with an existing ABN, it will need to submit a Payment times report.

Treatment of total income for mergers and acquisitions

When an entity satisfies the other reporting requirement, it becomes a reporting entity at the start of an income year based on its total income in its most recent income year, i.e. the previous income year. For controlling corporations which are seeking to determine the combined ‘total income’ of the members of the group they must consider whether an entity in their group has merged, been acquired or ceased to exist in the most recent income year. If so they must consider how that member’s ‘total income’ should be treated.

To calculate the combined ‘total income’ of a controlling corporation’s group, only the ‘total income’ of the member entities that are in the group at the start of the current income year should be included. Where an entity was in a group during the most recent income year but is no longer in that group, the entity’s income should not be included in the calculation of all the member entity’s most recent ‘total income’. This is because it is not a ‘member’ of the controlling corporation’s group at the time of the relevant calculation.

Where there was a new member of a group (for example as a result of a merger or acquisition) during the recent income year, the total income of that new member that is attributed to the group’s combined total income is the ‘total income’ for the time they were a member of the group. For example, an entity that was a member of the group for the last 3 months of the most recent income year should have that 3 month period of ‘total income’ included in the controlling corporation’s group combined ‘total income’.

If an entity became a member of the controlling corporation’s group in the most recent income year and is assessing whether it has a total income of at least $10 million it should consider the amount of total income for the part of the income year that it was a member. For example, if it was a member of the group for the last 6 months of its most recent income year it should consider its ‘total income’ calculated for that 6 month period.

If it is not possible to determine the actual ‘total income’ earned for the period the new member was part of the group, then entities should estimate the total income based on a proportion of the new member’s ‘total income’ for the most recent income year. For example, if the new member was a part of the controlling corporation’s group for the last 6 months of the most recent income year their ‘total income’ should be 50% of their total income for that income year.

Example:

Entity Z (a non-reporting entity) and Entity X (a non-reporting entity) have standard financial years. As at 30 June 2021, Entity Z recorded a total income of $25 million. Entity X recorded a total income of $40 million. Entity Z acquires Entity X on 1 January 2022. It becomes a group (Entity X continues to operate). On 30 June 2022, Entity Z has a total income of $50 million. The newly acquired Entity X has a total of $40 million before the acquisition. It also has $40 million after the acquisition (a total of $80 million).

Under this scenario, only the total income earned after Entity X was acquired by Entity Z is used to determine the group’s combined total income (presuming Entity Z is now a controlling corporation), i.e. $40 million:

  • The group does not initially meet the combined total income threshold. This is because its most recent combined total income would be $90 million (rather than the total $130 million). Therefore, both Entity X and Z would not be reporting entities in that income year.
  • The group may meet the combined total income threshold in the next income year. For example, if the group earns a combined total income of $130 million in the next income year and Entity X has a total income of at least $10 million. If so then both Entity X and Z would become reporting entities in that income year.