Working out your best assets

Starting up may mean launching your own venture. But it can also involve buying another business. However, be aware that the latter option isn’t hassle-free.

If you are looking for quick growth or you need scale quickly then buying a business can make a lot of sense.

The hard work is to find the right business, making sure that it stacks up and then agreeing on the price.

Get past this and the hard part of the acquisition should just about be there. But there may be one more important step – agreeing the apportionment of the price across the different assets that make up the business.

Sometimes the buyer and the seller have different ideas about how to apportion the sale price. You’ll need to make a call on this because it will be required for the contract.

So does it really matter? Does it make a significant difference?

If you cannot reach agreement can you simply show the sale price on the contract and let both sides manage their own apportionment?

The answer depends on what assets are included in the sale. In a typical business you may be buying plant and equipment or goodwill and stock.

These assets will have different tax treatments and this is why there are differences between the way a vendor and buyer wish to allocate the price.

Goodwill is a capital asset. 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 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.

With this mix the tendency is for vendors to want to push more of the sale price into the goodwill as it will cause 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.

Try to avoid the position where the contract is silent on the apportionment of the price and both parties 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 this is likely to trigger audit activity.

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 with the view to achieving a tax benefit.

While they can do this even where the contract does show the apportionment they are less likely to take this step where the parties are dealing at arm’s length.

Try to work through an agreement on the price. It could save some later tax headaches.

Greg Hayes is a director of Hayes Knight and specialises in taxation & business planning advice.