Tax and go: Taxation implications of the $39 billion Afterpay sale to Square
Tax Law - 04 Nov 2021
Afterpay’s $A39 billion sale in August to Twitter founder, Jack Dorsey’s payment firm, Square, made local and global headlines as the largest corporate merger in Australian history.
The above headline provides an opportunity to ‘unpack’ an incredibly complex transaction for the Tax Law team here at ABA Legal Group. For us, the fun part with these types of deals is looking at this holistically and understanding the personal and business obligations from a taxation perspective for those involved – including everyday investors.
This deal is heralded as being a ‘blockbuster’ and will see Square integrate Afterpay into its payment, banking, and shopping services networks across the US.
Founded in 2015, Afterpay was listed on the Australian Stock Exchange (ASX) in 2016. This deal sees it further cement its standing as one of the most successful companies in Australian history. It has more than 16 million customers globally and rose to the ASX top 20.
The news headlines also concentrated on the storylines around Afterpay co-founders Nick Molnar and Anthony Eisen – focusing on their status as freshly minted multi-billionaires.
Now, for the self-professed taxation law ‘nerds’ – we mean this in a loving way – this is where this story gets exciting…
You see, as is often the case in life, there is more to this story than meets the eye. Yes, the numbers involved in this transaction and the headlines such as this one, ‘Aussie company Afterpay sells for $39 billion to Twitter founder Jack Dorsey’s Square,’ indeed were eye-grabbing.
This isn’t a straight sale. As outlined in the first paragraph, this is a merger, a factor that substantially changes the narrative around this entire story.
That is because the buyer will not be offering a single dollar of cash; shareholders will instead be swapping their Afterpay shares. The articles explain that what they will be receiving for this swap is a 20 per cent stake in the US-headquartered and New York Stock Exchange-listed company Square.
Multiple reasons are driving this deal, including:
- Growing competition from players like Apple and PayPal;
- The banks entering the fray with their own Buy Now Pay (BNPL) offerings; and
- The potential for regulatory pressure.
This is fascinating stuff for anyone interested in the FinTech space and business trends in general. Our Corporate Advisory team has been fascinated reading about this deal as they love to investigate the ‘why’ and the business strategy driving an acquisition.
What exactly is a tax-free share trade?
However, this story focuses on the tax implications behind deals like this $39 billion merger and what do they usually mean in real terms for the parties involved?
- The ‘tax-free share trade’ is, in fact, usually a tax-deferred transaction using the ‘scrip for scrip’ CGT (Capital Gains Tax) rollover provisions.
- Where, under an eligible arrangement, a shareholder exchanges their shares in one company (i.e., the target company) for shares in another company (i.e., the acquirer company), they can elect to roll over any capital gain they might otherwise make.
- The key requirements to access scrip for scrip rollover where a capital gain would otherwise arise for the seller on the disposal of their shares are:
- There is an exchange of shares with shares (or units with units for unit trusts,);
- This exchange takes place under a single arrangement where:
i. the acquirer company acquires at least 80% of the shares in the target company;
iii. participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity. (There are different requirements for arrangements resulting from take-over bids.)
It is also important for all parties to consider any elections that need to be made and make sure they are done on time. There are also further conditions to be met where the arrangement is not conducted at arm’s length.
The scrip for scrip rollover provisions are not just for massive deals like Afterpay – they can be useful for small and medium groups who wish to restructure their group.
There are numerous other CGT rollovers and exemptions that can be utilised when selling your shares. Business owners risk leaving ‘money on the table’ if they do not seek professional advice when considering any group structuring.
Whatever the future for the combined Afterpay/Square entity, it is important to note that this merger focuses on the potential to drive billions of dollars of value in the future. It is going to be incredible to watch the next moves of the combined entity. The key takeaway for us is that there is always more behind the figures than meets the eye. It is critical to understand the taxation implications for your business before any significant decision.
If you are a business looking for the right advice to guide you through the growth process, we recommend you reach out to our Tax Law, Corporate Law, and Corporate Advisory team, who will guide you through this entire process.
Please get in touch to book a complimentary booking and have us help you actualise your true business potential.
*Our comments in relation to the Afterpay deal are based on the media articles read by our tax nerds and are general observations only.
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The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.