The impact of company amalgamations on financial arrangement determinations

Income Tax Act 2004 and Tax Administration Act 1994

The Commissioner recently issued an Interpretation Statement (IS0081) concerning the impact of company amalgamations on binding rulings.  A taxpayer has now asked whether the rights or obligations arising to an amalgamating taxpayer under a financial arrangement determination (determinations made under section 90, 90AC or 90A of the Tax Administration Act 1994 ("the TAA")) will pass to the amalgamated company on the amalgamation.

Under section 90AB(1) of the TAA, a person who becomes, or who intends to become, a party to a financial arrangement may apply to the Commissioner for a determination to be made under section 90AC(1).  This item is concerned with these taxpayer specific determinations, not with general financial arrangement determinations which the Commissioner may also make under section 90AC(1).  General determinations will apply to all taxpayers within the scope of the determination, irrespective of an amalgamation.

Section FE 8

There is nothing in either the TAA or the amalgamation provisions of the Income Tax Act 2004 ("the ITA") which specifically addresses the issue of whether an amalgamated company will succeed to any rights or obligations arising to an amalgamating company under a financial arrangement determination.  However, section FE 8 of the ITA provides as follows:

FE 8

Where any amalgamating company ceases to exist on an amalgamation, the amalgamated company must, in accordance with section 209G of the Companies Act 1955 or section 225 of the Companies Act 1993, comply with all obligations of and meet all liabilities of, and be entitled to all rights, powers, and privileges of, the amalgamating company under the Inland Revenue Acts with respect to the tax year in which the amalgamation occurs and all preceding tax years.

It may be that there are "rights" arising under a financial arrangement determination.  For example, sections 90(9), 90AD(3) and 90A(9) of the TAA provide that if a person has applied a determination under the relevant section, "... an assessment made in respect of the person must be in accordance with the determination".  However, whilst this may give rise to a "right" in respect of any assessment made by the Commissioner, it is arguable that in the context of self-assessment, it is more an "obligation".  It is also noted that sections 90(2), 90AC(3) and 90A(2) provide that:

90(2)

Any determination made under any of paragraphs (a), (c), (e), (g), (h), and (j) of subsection (1) shall be binding on persons for the purposes of the old financial arrangements rules.

...

90AC(3)

A determination made under any of subsection (1)(a), (1)(d), (1)(h), (1)(i), or (1)(j) is binding on persons who are subject to the financial arrangements rules.

...

90A(2)

Any determination made under subsection (1)shall be binding on persons for the purposes of subpart FG of the Income Tax Act 2004.

[Emphases added]

It is considered that this language appears to suggest that (at least in those particular cases) the financial arrangement determination will give rise to an "obligation" rather than a "right".

However, as with any rights arising under a financial arrangement determination, any obligations would be succeeded to by the amalgamated company.  Section FE 8, as well as talking about rights, powers and privileges, states that "... the amalgamated company must ... comply with all obligations of and meet all liabilities of ... the amalgamating company under the Inland Revenue Acts ...".  Similarly, section 225(e) of the Companies Act 1993 provides that "[t]he amalgamated company succeeds to all the liabilities and obligations of each of the amalgamating companies".

Accordingly, it is considered that the rights or obligations arising to an amalgamating taxpayer under a financial arrangement determination (which would clearly be rights or obligations under the Inland Revenue Acts - namely the TAA) will pass to the amalgamated company on the amalgamation.

It could be argued that in a situation of an amalgamation resulting in the deemed disposal by the amalgamating company and acquisition by the amalgamated company of a financial arrangement (i.e. in the case of a non-qualifying amalgamation), there is effectively a new financial arrangement for tax purposes, which may alter the above conclusion.

However, the TAA provisions (noted above) which provide that financial arrangement determinations will be binding (thus giving rise to an obligation) state that they will be binding:"on persons for the purposes of the old financial arrangements rules" (section 90(2)), "on persons who are subject to the financial arrangements rules" (section 90AC(3)), and "on persons for the purposes of subpart FG of the Income Tax Act 2004" (section 90A(2)).  The obligations under financial arrangement determinations relate to the application of the financial arrangements rules to the persons who are subject to them - i.e. the parties to the financial arrangement.  The fact that there may be a disposal and acquisition of a financial arrangement for tax purposes (i.e. in the case of a non-qualifying amalgamation) does not alter the fact that the parties to the financial arrangement (which the amalgamated company would clearly be) are subject to the obligations (or entitled to any rights) under any financial arrangement determination which relates to the financial arrangement in question.

It is noted that the question of whether it may be argued that section FE 8 restricts the assumption of Inland Revenue Act rights, powers and privileges to those with respect to the income year in which the amalgamation occurs and preceding income years is considered in IS0081 The Impact of Company Amalgamations on binding rulings (Tax Information Bulletin, Vol 17, No.6 (August 2005)).  That Interpretation Statement concludes that section FE 8 does not restrict the assumption of Inland Revenue Actrights, powers and privileges to those with respect to the year of amalgamation and previous years, as opposed to what would otherwise be the position under company law.  This conclusion is equally applicable in terms of the assumption of Inland Revenue Act obligations and liabilities.

The principle of "continuance"

In any event, it is considered that the same result arises by virtue of the principle of "continuance", which is discussed in IS0081.  As noted in IS0081, it is considered that the principle of continuance remains applicable for the purposes of the ITA, to the extent that it is not altered by specific provisions in the ITA.  For present purposes, the principle of continuance is not altered in any way by specific provisions in the ITA.

Section FE 7(2)

It is also noted that section FE 7(2)(b)(i) of the ITA provides that in the tax year of amalgamation, and subsequent years, the amalgamated company is treated as if it had entered into the financial arrangement on the same date (and for the same consideration) as the amalgamating company.  The effect of this provision is considered to be consistent with the result arising by virtue of the principle of continuance.

It may be argued that section FE 7(2) of the ITA further supports our view that the rights or obligations arising to an amalgamating taxpayer under a financial arrangement determination will pass to the amalgamated company on the amalgamation.

CONCLUSION

For the above reasons, it is concluded that the rights or obligations arising to an amalgamating taxpayer under a financial arrangement determination will pass to the amalgamated company on the amalgamation.  This will be the case whether the amalgamation is a qualifying amalgamation or a non-qualifying amalgamation.