Home > Updates > Accounting for buying or selling a business
Buying or selling a business from an accounting perspective isn’t as straightforward as you may think. It is important to consider all aspects and ensure the details are correct from the beginning to avoid an unexpected tax bill once the transaction is complete.
In particular it is important to consider the following aspects:
Ensure you have a legally binding contract to provide certainty regarding the transaction. A sale and purchase agreement sets out the terms and conditions for both parties to discuss, negotiate and sign. If this agreement is not completed and agreed upon, the transaction is not legally binding. The sale and purchase agreement will also determine how the transaction is treated for tax purposes.
The GST treatment depends on the sale and purchase agreement and the GST status of each party. If both parties are GST registered, and land or a lease are part of the transaction, generally the transaction must be zero-rated (GST rate of 0%). If there is no land or lease involved, in order for the transaction to be zero-rated sale between two GST registered parties, the vendor needs to be selling all that is required to operate the business (eg, equipment, intellectual property, customers, suppliers etc) and the sale and purchase agreement must state that the transaction is a going concern. Getting the GST treatment wrong can be costly.
Negotiations regarding the price allocated to tangible and intangible assets are vital as the outcome will ultimately impact income tax for both parties. Tangible assets are the physical items of the business (eg, fixed assets and stock), while intangible items are non-physical items that add value to the company (eg, intellectual property and goodwill). The vendor will typically try to allocate most of the purchase price to intangible assets to minimise depreciation recovery income, while the purchaser will try to allocate the purchase price to tangible assets to maximise the future depreciation deductions. These asset allocations are now constrained by the Purchase Price Allocation rules, so be sure to seek our advice on this aspect.
Legal fees and all costs directly associated with the purchase of a business are treated as non-deductible capital expenditure and are typically added to the purchase price of the business. If however the purchaser’s total legal fees for the year are under $10k, the purchaser can receive a tax deduction for the legal fees. On the other hand, legal fees incurred by the vendor in connection with the sale of the business will be non-deductible capital expenditure.
If you are considering buying or selling a business, please get in touch with your Nexia advisor so we can ensure the transaction is done in a tax efficient manner.
