Proposals in the new tax Act will mean sellers of a business must notify buyers and Inland Revenue about the amounts they have allocated for various assets.
If they don’t do this there will be rules about how this is to be handled.
Also, Inland Revenue will be able to interfere with the figures, if it thinks the allocation does not reflect market value. However, it won’t do so where the amount involved is less than $1 million.
When a business is bought or sold there is often an issue of how you apportion the assets.
The buyer wants to arrange the assets to get the best tax deal and the seller has the same ambition.
Think about the following situation.
A business is being sold for $200,000. It comprises some stock, various pieces of equipment and furniture with different depreciation rates and goodwill.
As a buyer I want the goodwill figure to be as low as possible because I can’t get any depreciation or tax write-off on this figure. In my books, I give it the value of $10,000.
The seller wants to sell his stock, equipment and furniture for the smallest possible figure and places a value of $100,000 on goodwill.
The buyer is going to make the stock, equipment and furniture as big a proportion as possible of the $200,000 and the seller is going to do the opposite.
You can see the only one missing out is Inland Revenue, so it’s going to tighten up the rules.
When you come to sell your business:
You might like to consider specifying in the sale and purchase agreement how the price is to be split over the various assets you are selling.
When the buyer signs the contract they will be agreeing with your figures.
If you need advice on the selling and buying of a business, talk to us at KTS, we are very experienced.