Reverse takeovers and continuity rules

Sections OB 1 and OD 5AA, 1994 and 2004 Income Tax Acts

The concessionary continuity rules, which apply to carrying forward losses and imputation credits when there is a change in a company's shareholding, have been extended to recognise that continuity can be maintained through reverse takeovers or mergers. The new rules apply when both companies involved in the takeover or merger are widely held or listed companies.

Background

Normally a company must have a continuity of shareholding of 49% to enable it to carry forward its tax losses for New Zealand income tax purposes. In relation to imputation credits, the required continuity percentage is 66%. These continuity rules are premised on tracing shareholding through groups of companies back to noncorporate shareholders. Concessionary rules allow for the fact that this is not practical in a number of circumstances.

Under the previous concessionary continuity rules, there was no provision to carry forward tax losses when a smaller, widely held listed company took over or merged with a larger one. However, conceptually, the takeover or merger itself should not have caused a breach of the continuity rules resulting in the forfeiture of tax losses or imputation credits when the continuity of shareholding thresholds of at least 49% or 66% was satisfied.

Key features

A new section OD 5AA has been inserted into the 1994 and 2004 Income Tax Acts to provide a new ownership tracing rule for reverse takeovers. The new rule will apply to a "changeover" in a limited attribution company (the initial parent) which is treated as holding ownership interests in another company (the subsidiary). A "changeover" can be a change in ownership, or a situation where the initial parent ceases to exist because of an amalgamation.

Continuity will not be lost if:

• immediately before the changeover the initial parent is treated as holding all the ownership interests in the subsidiary; and
• immediately after the changeover another limited attribution company (the new parent) is treated as holding all the ownership interests in the subsidiary; and
• before and after the changeover, each shareholder in the initial parent owns shares in the new parent in the same proportion to other shareholders in the initial parent (ignoring other interests in the new parent the shareholder might have); and
• there is commonality (49% of the carry forward of losses, or 66% for the carry forward of imputation and dividend withholding payment credits) in:
  • the ownership interests in the initial company that are treated as being held by the initial shareholders immediately before the changeover; and
  • the ownership interests in the new parent that are treated as being held by the initial shareholders immediately after the changeover.

"Limited attribution company" is defined in section OB 1 and is a:

1. building society
2. cooperative company
3. listed company
4. widely held company
5. foreign company that is not a closely held company.

Application date

The new rule applies for changes in ownership occurring in the 1998-99 or a subsequent income year, if the company files a tax return on the basis that the requirements of a continuity provision are satisfied in relation to the change of ownership. More generally it applies from 3 April 2006, the date of assent of the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006.