Apportion or not apportion

Nathan asks: I am buying a business and my solicitor has told me that the contract should list the value of each asset of the business, but my accountant has told I should not. What is the big deal and what should I do?

The conflicting views are generally taxation driven and, from your lawyer’s point of view, arguably showing the values in the contract removes any uncertainty as to the agreed values. However, from your accountant’s viewpoint, there may be circumstances where you don’t want the contract detailing the values of each asset, but instead just having a total contract price.

From a practical view point having no apportionment of value removes any argument between the purchaser and vendors as they each have competing tax outcomes, but if the values are important in arriving at the total business price, then this is a different story..

A vendor will normally want a low stock value and low plant & equipment value as compared to a high goodwill or land & building value. This is because the goodwill and land & buildings will at least attract the 50% general capital gains tax discount and if applicable the small business capital gains tax concessions. However, selling the plant & equipment for more than the written down value or trading stock will result in the additional amount being taxable.

It is the opposite for the purchaser who wants to maximise his tax deductions and therefore having a higher value for stock and plant & equipment is an advantage, while the goodwill and land & buildings are capital assets and do not generate tax deductions.

When you buy or sell a business you could be worlds apart on the value of individual assets, and coming to an agreement, on value, especially when there is a positive or negative tax outcome can be very problematic and delay or even impede the sale. So not detailing the value can remove this argument, if you have an agreed overall price and each can obtain independent valuations on the assets.

Importantly, the contract does not bind the Commissioner, nor does it force any party to use those figures in their tax return. But it can evidence a genuine bargain or forced sale situation and, in the absence of manipulation or indifference by not dealing at arm’s length, then the contract values should be able to be relied upon.

Importantly, you are not necessarily dealing at arm’s length, if say the vendor allows, for example, higher values of the stock and plant & equipment because they have accumulated tax losses and are indifferent to having the high values attributed.

Should the contract not detail the values attributed, then an independent valuation is recommended to support how you deal with the assets and their value.