Tax Considerations

Most plant and equipment is subject to depreciation, where the owner can claim a tax deduction for a certain percentage of its value each year. Plant and equipment is not subject to Capital Gains Tax, as it is “otherwise assessable” under s 118.20 of the Income Tax Assessment Act 1997 (Cth) (ITAA).

From the Vendor’s viewpoint

The sale of plant and equipment as part of a sale of business is a “balancing adjustment event” within the meaning of ss 40-280 to 40-370 of the ITAA. Under these provisions, the vendor is liable for income tax if the plant and equipment is sold for more than its depreciated or written down value. Similarly, the vendor will be entitled to a tax deduction for the difference between the written down value of an asset and its sale price, if it is sold for less than the written down value.

Even though the overall contract price has been agreed, there is often debate as to how much should be allocated to goodwill, as opposed to plant and equipment. The vendor will usually try to minimize the figure for plant and equipment, to minimize income tax, as this is usually higher than the capital gains tax applying to goodwill. Small businesses, with annual turnover under $10 million, can claim a tax deduction by instantly writing off the whole of the purchase price of any plant and equipment for less than $20,000. Accordingly, vendors will pay income tax on the whole of the value of any such equipment included in the subsequent sale. This gives vendors a strong incentive to minimise the value of plant and equipment in sale of business contracts.

The contract for sale of business will usually divide the agreed purchase price into:

• • goodwill;
• • plant and equipment; and
• • stock.

However, careful examination of the balancing adjustment provisions of the ITAA shows that it is the value of the assets, not the expressed purchase price that should be taken into account in calculating any balancing adjustments to the vendor’s tax.

From the Purchaser’s viewpoint

A purchaser will be able to claim a tax deduction for depreciation for plant and equipment, but not goodwill, which cannot be depreciated, for tax purposes. Accordingly, the purchaser will try to reduce the amount expressed to be paid for goodwill with a corresponding increase in the amount allocated for plant and equipment.

This can lead to arguments between the vendor and purchaser. However, the ITAA states that, where several assets are bought together, it is the value of the relevant asset which counts in calculating future tax deductions for depreciation, not the stated price breakdown.

Other Depreciating Assets

The same considerations and the same laws apply to other assets sold as part of the business including:

• • improvements to land;
• • fixtures forming part of real property, even if they are not removable;
• • computer software; and
• • intellectual property, including copyright, registered design and patent (but not goodwill).

This is pursuant to s 40.30 of the ITAA.

See Tax considerations.