In brief

  • Taxation laws were changed last year to allow companies to claim a deduction for the cost allocated to acquiring a ‘Right To Future Income’ (RTFI). Examples of a RTFI include a right to receive a trailing commission or fees under a long term service or supply contract.
  • The changes were retrospective and allowed companies to claim a deduction resulting from M&A transactions going back to 2002.
  • Due to concerns about the cost of these measures to the government revenue, on 31 March 2011 the Assistant Treasurer announced a review into whether any changes should be made to these provisions to claw back some of the revenue. The review is also to consider whether any changes will be retrospective.  

Background

By way of very broad summary, under the Australian tax consolidation rules when an Australian company acquires 100% of the shares of an Australian target, the tax costs of the target are reset by reference to the sum of the cost of the shares and liabilities of the target less the after tax effect (ie 30%) of any tax losses transferred by the target to the acquirer.

Until last year, if a company acquired a target which had a RTFI, it was unclear whether the acquirer could offset the cost allocated to that contract against the income that it would subsequently receive, and if so, over what period that cost be could be deducted. In June 2010 the tax law was amended to allow an acquirer of an Australian company holding a RTFI to claim a tax deduction for the tax cost allocated to the RTFI over the lesser of the life of the asset or 10 years.

A RTFI is defined to cover ‘a valuable right (including a contingent right) to receive an amount for the performance of work or services or the provision of goods (other than trading stock) if:

  1. the valuable right forms part of a contract or agreement, and
  2. the market value of the valuable right … is greater than nil.’

There is considerable debate about what is, and is not, a RTFI for these purposes and whether it extends to perpetual service contracts and service contracts that require annual renewal.

These amendments were made with retrospective effect allowing a company to claim deductions in prior year returns where it had undertaken a takeover since the start of the consolidation regime on 1 July 2002. A number of companies have lodged applications for significant refunds of tax relating to prior year transactions.

30 March announcement

On 30 March 2011 the Assistant Treasurer announced that the Board of Tax would undertake a review of the rules relating to RTFIs as a result of the rules potentially ‘having a substantially greater revenue impact than anticipated.’ The Board of Tax has been asked to consider whether any amendments should be made and, of particular concern, whether any changes should apply retrospectively.

The Board is to report to the Assistant Treasurer by 31 May 2011.

Possible impacts for M&A transactions

The RTFI rules were the subject of considerable consultation and concerns with the potential revenue impact were raised during that process. It is disappointing that the rules have to be amended so early after enactment.

The benefit of any deductions relating to RTFIs for future acquisitions should be discounted given the uncertainty.

In addition, the potential retrospective amendment to these rules is worrying given that deals have been concluded and taxes and dividends have been paid based on the current rules.