Buying mortgage companies

In the past tax considerations on an acquisition dictated buying mortgage companies. Under the new tax consolidation regime this fundamental investment principle no longer applies. The share purchase price paid on an acquisition was simply not recognised in the “cost” of underlying target company assets.

While vendors often reap significant benefits from selling the company, quite the opposite was true for buying mortgage companies. Potential investors should not be close-minded about acquiring a company and not the mortgage business. A buyer who directly acquired a business did not have this problem. For a buyer, the cost of the acquired company’s assets was locked into the cost base of the target company shares and could not be used to reduce capital gains arising upon the sale of the target company’s assets.

Owing to the tax cost setting rules under consolidation, a corporate buyer that acquires a company and elects to tax consolidate will gain recognition for the cost incurred to acquire the subsidiary in the cost base of the subsidiary’s underlying assets. The cost of the subsidiary, no longer trapped in the cost base of the shares in the subsidiary, instead provides an uplift in the cost base of the subsidiary’s inventory, plant and equipment or goodwill, which may previously not have had a cost base. This problem is removed under tax consolidation with buying mortgage companies. The potentially significant advantages of this “spreading” of the cost base include:

(i) increased depreciation deductions; and

(ii) reduced capital gains upon an eventual sale of business assets.

Notwithstanding significant tax disadvantages of buying mortgage companies company are removed under tax consolidation, as any prudent investor is aware, it is still critical that the commercial risks and other tax implications of any significant investment be carefully considered.