BALDWINS • FoodLegal

Australian Lawyers and Consultants

More Tax Risks in Selling a Business

August 2003

Low Value Pools for Plant and Equipment: Vendor beware: you can be precluded from claiming your loss on the write-off of low value pool items! For businesses with a substantial value in their low-cost equipment pool, this may result in a heavy cost unless the deal is structured so that the vendor receives adequate consideration for the ‘low value pool’ in a situation giving the purchaser the right to claim the write-off instead.

Deductions after cessation: Following the cessation of a business, payments of interest and rent may still be tax deductible, but only if the payments are referrable to an agreement entered at a point in time that pre-dates the cessation of the business. However, there are risks that need to be planned for to conform with case law and tax rulings to ensure deductibility will be given.

Leave adjustments: It should be noted that some industry awards still accrue sick leave. As a result, the total sick leave entitlements owing to employees may be significant. Long service leave and annual leave issues also need to be negotiated in the sale price for a business that is being sold. Some future entitlements such as long service leave are contingent on a minimum service period and adjustments in favour of the purchaser should recognise this. Also, given the vendor cannot obtain a tax deduction for any such adjustment in favour of the purchaser, the amount of the adjustment by the vendor to the purchaser should also be discounted by the tax rate in recognition that the purchaser can claim a tax deduction for direct payment of the entitlement to the employee to be made at a future date.

Rollovers: Careful pre-planning is required to take advantage of potential capital gains tax (CGT) rollover relief provisions that may apply for a vendor to reduce the vendor’s CGT liability on sale of the business. It can be too late to consider the options available if not planned before the sale.

Small Business retirement exemption: Certain qualifying taxpayers can elect to disregard a capital gain from a sale of business (or shares in a company owning a ‘small business’) up to a lifetime maximum of $500,000 per principal, if the proceeds are used to pay a retirement lump sum (ETP) to the retiree aged over 55 or, if the person is aged under 55, the amount can be locked into a superannuation fund, that Baldwins can establish for the client. The amount of the ETP will be considered a "CGT exempt component" where the ETP arose by the taxpayer claiming the small business retirement exemption. A "CGT exempt component" in a superannuation fund can retain its tax exempt status on payout.

The ETP does not have a post-June ‘83 component or a taxed element. However, the CGT exempt component can be taxable if it is taken to be an "excessive component", which may happen inadvertently if the Tax Commissioner does not make an RBL determination in relation to the ETP, such as because of failure by the business vendor director to notify the ATO correctly.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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