Income tax

Selling a business may trigger ordinary income tax as follows:

Stock

A sale of stock included in a sale of business will attract income tax, just like the ordinary sale of stock in the course of the operation of a business.

Depreciable assets

Where plant and equipment are sold for more than their written down value, the difference is subject to income tax. Similarly, any sale for less than the written down value will create a deductible tax loss.

Conflict between vendor and purchaser

CGT is generally less than income tax. Accordingly, a vendor will try to structure the breakdown of the sale price to maximise the component for goodwill, and minimise the components for plant and equipment. A purchaser will try to do the opposite.

Taxation minimisation schemes

Taxation legislation imposes limits on the manipulation of value of assets included in a sale of business. This includes the following:

Market value

Assets will be deemed to be sold at market value, rather than at their stated prices, if the sale is not at arm’s length. This is covered by s 70-90 of the ITAA 1997 in respect of the sale of trading stock, and s 112-20 (market value substitution rule) of the ITAA 1997 for the cost base of a capital item.

Schemes to reduce income tax

Part IVA of the Income Tax Assessment Act 1936 (Cth) states, in effect, that any scheme to reduce tax will be void as against the ATO.

The role of the accountant

The client’s accountant is responsible for the client’s overall tax planning. Accordingly, it is important that the accountant should be consulted as to any tax strategies suggested by the solicitors acting on a sale or purchase of business.

See Income tax.