How to allocate the selling price of a business between assets and goodwill to save on taxes

Allocating the selling price of a business between assets and goodwill

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.

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How to minimise tax when selling your business

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. Factors such as pre-CGT assets, available capital losses, and small business CGT concessions must be considered.

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How to minimise tax when buying a business

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.

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.

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Other factors to consider when selling your business

Furthermore, the allocation of the purchase price to goodwill and other assets will determine the "dutiable value" of those assets for stamp duty purposes.

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, realisable value, cost, income, or some other method.

Need advice on business sale?

CTK Accounting is a registered CPA and tax agent accounting firm based in Wollongong Australia, please enquire here.

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