Buying & Selling Businesses Blog Series - Part 5B - What can go Wrong after the Sale has Been Completed
Following on from part 5A of what can go wrong, below are a number of taxation related issues which can arise.
(A) Stamp Duty
Apportionment: dutiable property - In NSW stamp duty is assessed on the combined dutiable value of all items of dutiable property agreed to be sold or transferred. The liability to duty will only extend to those assets identified as dutiable property. In the context of a sale business dutiable property includes:
- Leasehold interest in land.
- Intellectual property: Intellectual property is only considered to be dutiable property when sold or transferred in conjunction with the goodwill of the business.
- Statutory licences.
- Various items of goods including fixed and moveable plant and equipment.
Non dutiable property which may be included in a sale of business are:
- Materials used in manufacture or goods under manufacture.
- Registered motor vehicles.
Apportionment re location of assets - Situations may arise where certain assets, the subject of a business sale agreement, cannot be isolated within State boundaries and as such will be subject to differing duties in the locations relevant to the business.
Timing - The time for stamping a document or a written statement in each jurisdiction varies from as little as 1 month in Queensland, 60 days in Tasmania and the ACT, 30 or 60 days in the Northern Territory, 2 or 6 months in South Australia, and 3 months in NSW. If the one original document must be sent to each jurisdiction, the timing requirements for certain States or Territories may not be met.
Valuation of the Goodwill - When valuing goodwill, it is important to bear in mind that:
- goodwill will have no value unless it is capable of being transferred from one person to another – so, if it rests exclusively with a person that will not be joining the business, the purchaser will prima facie not be acquiring the good will; and
- the goodwill of a business is dutiable property if during the previous 12 months a sale of goods and/or services has been made in NSW.
In light of this, in circumstances where the value of the goodwill has been incorrectly (or over-) valued, the valuation will not accurately reflect the commercial or financial worth which it represents. This may be of detriment to a purchaser when paying stamp duty. A contract dutiable in other states and territories may in effect be "audited" by OSR's in those states.
Methods of valuing goodwill include:
- number of year's purchase of past net profits; number of year's purchase of future super profits; and capitalisation of maintainable profits
(B) Goods and Services Tax
GST liability is a real concern in relation to any contract for sale of business. At a high level, if the business is sold as a going concern with commercial leases being assigned then GST is normally not payable.
But where the business is not sold as a going concern or the premises are mixed between residential and commercial or otherwise, GST may be payable. As set out in the Australian Taxation Office's Goods and Services Tax Ruling 2002/5 "Goods and services tax: when is a 'supply of a going concern' GST-free?", the supply of a business as a going concern may be GST-free if the following requirements are met:
- the purchaser must be registered for GST on or before the date of the supply;
- the supply must be for consideration;
- the vendor must carry on the business until it is sold;
- the vendor must supply to the purchaser all of the assets and other elements required for the continued operation of the business;
- both parties must agree in writing that the supply is of a going concern.
If the business is not sold as a going concern and GST is payable then a tax invoice should be issued on completion so that input credits can be claimed and GST paid, all of which is part of the process if the GST issue was considered before contracts were exchanged and addressed in pre-contract negotiations and the outcome accurately recorded. But if these events have not occurred then on completion a purchaser may be rendered an invoice for the purchase price plus GST or if on completion the parties do not address the issue then at a later time when a BAS statement is lodged a purchaser or vendor may unexpectedly become liable.
In addition, the Office of State Revenue considers that, where GST applies to the sale of assets, and is passed on to the purchaser, the GST forms part of the consideration for the sale and duty will be calculated on the purchase price inclusive of GST.
(C) Capital Gains Tax
The completion of the sale of a business amounts to a capital gains tax event. If the business was formed before 1985, CGT is not payable by the vendor, but for businesses formed subsequently capital gains tax is payable subject to small business concessions including roll over relief. The issue can become particularly complicated though where the small business roll over provisions are not available and there is some doubt that the business has been conducted without interruption since before 1985. A failure to evidence continuous conduct of the business over a long period of time could mean that a substantial amount of the purchase price is eventually liable to be paid in capital gains tax.Back