26 November 2011
If you thought reaching an agreement on price was difficult, wait until you get to the fine details of buying or selling a business.
Once you’ve reached an agreement on price there is still a lot of negotiation to be done to work through the differences between the parties on how the sale price should be apportioned across different assets.
Put it in writing
In a typical business purchase, you might be buying plant and equipment, goodwill and stock. A solution that’s sometimes proposed is to simply show the sale price on the contract and let both sides manage their own apportionment but this depends on what assets you are buying.
These assets will have different tax treatments and may incur differences between the way a vendor and buyer wish to allocate the price. It is essential that any decision about purchase price components is well documented and reasonable.
Buying capital assets
The vendor will calculate a capital gain or loss on the sale of the business. Even with a capital gain they may be able to reduce the tax to nil using the CGT small business concessions.
For the purchaser, there is no tax deduction on the purchase of goodwill; it becomes a capital asset and a tax offset will only be available if and when the business is later disposed of. The plant and equipment is also a capital asset. The vendor will account for their tax position on these assets based on their written down value. Where the assets have been substantially depreciated there will be more of an income adjustment.
For the purchaser, the plant is normally a depreciable asset and will be written off over its effective life. So, you get a tax write-off but it takes time.
The stock is on revenue account. For the vendor, they will account for the stock in their assessable income in the year of sale. For the purchaser, the stock is deductible as it is sold.
Vendor vs Purchaser position
With this mix the tendency is for vendors to want to push more of the sale price into the goodwill as it will create a better tax outcome for them. Purchasers will want to take full value in the stock and plant as this will give a faster tax write-off. For the purchaser, this may be about timing of the tax benefit; over time it may equalise, although there are circumstances where tax benefits can be lost. There are advantages and disadvantages in deciding whether to be silent or specific on value allocation in the contract. A contract that is silent on the apportionment of the price allows each party to make up their own minds.
The Tax Office has a strong data matching capability and where they detect a difference between how the price was accounted for by the parties there is a possibility of triggering further investigation.
The price should be apportioned on a fair market value basis and the ATO does have the power to allocate price where they believe there has been an artificial apportionment to achieve a tax benefit.
While they can do this even where the contract shows the apportionment, they are less likely to take this step where the parties are dealing at arms-length and where advice is sought on appropriate methods of allocation. Getting the right advice could save some tax headaches.
Are you thinking about buying a business?
Check out our Buying a Business or Selling a Business Fact Sheets for more tips about buying or selling a business. You can also contact us on 02 9957 4033 for more information about what’s involved in apportioning assets in a contract of sale.
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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.