A point of tension in any sale of business is how to allocate the purchase/sale consideration across different assets. Purchasers often want more proceeds allocated to revenue assets such as depreciating assets and less to goodwill as this is more advantageous. Conversely, vendors often want more proceeds allocated to ‘capital gains assets’ such as goodwill to avail themselves of potential CGT concessions with the potential of paying no or little tax.
One solution to avoid a stalemate in negotiations is to leave the sales price unallocated in the contract. Each party can then make an allocation themselves across the different assets.
The tax legislation provides that where there is a sale of more than one asset with no allocation in the contract, then the proceeds can be allocated on a ‘reasonable basis’. However, there is no definition or description of what constitutes ‘reasonable’. The vendor and the purchaser must determine a basis for ‘reasonably’ allocating the price.
The Australian Taxation Office (ATO) has advised it will accept an allocation of price agreed between arm’s length vendors and purchasers. However, in the absence of an agreement, the ATO advises “each party would generally have regard to and be able to justify their reasonable apportionment based on the relevant value of the separate assets at the time of the making of the contract”.
For example, a retiring Dentist is selling his practice to a recently qualified dentist. The sales contract specifies a price of $1 Million and includes the patient list (goodwill), dental chairs, dental equipment, office fitout and furniture and a computer system.
The retiring dentist had already written off the depreciation on the plant and equipment on an accelerated basis as allowed under the small business depreciation measures. Therefore he wishes to treat the sale of plant and equipment at the book value ($nil) and allocate the rest to goodwill. This may not be considered reasonable on the basis that the plant and equipment, even though fully depreciated for tax purposes, would have some residual selling value.
Conversely, the purchasing dentist wishes to allocate more of the proceeds to plant and equipment as she knows she could get a minimum 30% depreciation deduction using the small business depreciation methods.
The sales contract can state a price of $1 Million and not allocate it across the different assets leaving each party to make their own allocation of the price. It is quite conceivable that a purchaser will have a different allocation of what assets this sale price is apportioned to as compared to the vendor and that is acceptable as long as they both have a reasonable basis for their respective allocations.
Australia has a self-assessment tax system, so the ATO accepts tax returns as being correct unless it chooses to audit a taxpayer. It is only in the event of an audit that the taxpayer must be able to justify the allocation used. We recommend the taxpayer keeps records of how they have made the allocation. These records should be kept for five years after the asset has been sold.
Hanrick Curran are experts in dealing with the tax affairs of health professionals and can assist with business structuring, advice on purchases and sales of businesses and legally minimising tax paid along the way. Should you require assistance, please contact Tim Taylor on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice. Hanrick Curran will not be held responsible for any issues caused from a taxpayer relying on this general information when their full circumstances have not been taken into consideration.