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This article provides guidance on how to allocate the price paid for a business to its assets, with a focus on the tax implications for both the seller and the buyer. At CTK Accounting, we understand the importance of properly allocating the purchase price and can provide guidance to ensure that our clients make the most tax-efficient decisions, minimising their obligations to the Australian Taxation office.
When a business is sold, the price paid is typically expressed as a lump sum based on a multiple of maintainable earnings. While the allocation of the purchase price to the business assets does not affect the price paid, it does have significant tax consequences for both parties.
From the seller's perspective, the price received for the business may be considered capital proceeds for CGT purposes, which can have different tax treatment depending on whether the asset is a CGT or a revenue asset. At CTK Accounting, we can advise on the most tax-efficient allocation of the purchase price, taking into account factors such as pre-CGT assets, available capital losses, and small business CGT concessions.
The buyer of a business may want to allocate more of the purchase price to plant and equipment, which is depreciable, and less to goodwill, which is not depreciable. They may also prefer to allocate as much as possible to intangible assets, which can be amortized, rather than goodwill. At CTK Accounting, we can help our clients navigate these complex decisions to ensure that they make the most tax-efficient choices.
It is important to note that the value of an asset being transferred will generally be the amount allocated to that asset and agreed upon by the parties. However, the market value substitution rule may come into play in some cases, such as when the sale of a business is between related parties.
Furthermore, the allocation of the purchase price to goodwill and other assets will determine the "dutiable value" of those assets for stamp duty purposes. At CTK Accounting, we can help our clients understand the duty payable on sales of businesses in various states and territories in Australia.
The purchase price allocation will depend on the valuation method used for each asset. Valuations may be based on book value, market value, written down value, realizable value, cost, income, or some other method. At CTK Accounting, we can provide advice on the most appropriate valuation method for our clients' circumstances.
CTK Accounting is a registered CPA and tax agent accounting firm based in Wollongong Australia, please enquire here.
