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Most business asset sales are mixed supplies, meaning they involve a mixture of:

  • revenue (taxable) assets like trading stock, personal property or patents
  • depreciable assets like plant or machinery
  • capital (non-taxable) assets like goodwill.

The buyer and the seller can choose how much of the sale amount belongs to each type of asset. This is called allocating the sale price. It affects the tax paid, and the tax benefits or profits received.

In this kind of sale, people often allocate the sale price in the way that benefits them the most. For example, a buyer allocates a higher amount of taxable and depreciable assets so they can claim expenses and depreciation in their income tax return. In contrast, a seller allocates a higher amount of non-taxable assets so they can pay less tax on the income from the sale.

Setting the sale price allocation

It’s important to set the allocation in reasonably the same way for both sides.

When you buy or sell a business asset, make sure that both sides:

  • agree on how the sale price is allocated between taxable, non-taxable and depreciable assets
  • allocate the sale price for both in line with market value.

Correcting the sale price allocation

If we find that the buyer and seller did not allocate the sale price in reasonably the same way in their income tax returns, or did not allocate it in line with market values, then we are likely to:

  • investigate the sale
  • set our own allocation for tax purposes
  • reassess any incorrect GST or income tax returns (whichever applies for either side).

In case of a disagreement between us and you, it’s your responsibility to prove that your sale price allocation is correct.

This can take a while and can lead to a tax bill for either side. It’s best to get it right from the start.

Tax on business asset sales

Selling business assets - Capital Coffee Roastery

Jesse sells his business ‘Capital Coffee Roastery’ to Connall for $200,000. It’s a mixed-supply sale made up of taxable, non-taxable and depreciable assets.

The business is being sold as a going concern and meets the GST requirements, so is zero-rated for GST – neither side pays nor receives GST on the sale.

Jesse and Connall work together along with their accountants and professional tax advisors to allocate the sale/purchase price to each type of asset. Based on market value, they agree that:

  • the coffee beans, bags and other trading stock are worth $30,000 – these are taxable (revenue) assets
  • the factory and roasting equipment are worth $70,000 – these are depreciable assets
  • the business’s good reputation to its customers (goodwill) is agreed to be worth the remaining $100,000 – these are non-taxable (capital) assets.

As the seller, Jesse must pay income tax on the $30,000 worth of taxable assets. He may also need to make an adjustment in his tax return to account for the $70,000 factory and roasting equipment he previously claimed depreciation for.

As the buyer, Connall can claim $30,000 as an expense in his income tax return. He can also claim depreciation on the $70,000 factory and roasting equipment.

Neither Jesse nor Connall will pay tax or can claim expenses for the $100,000 allocated to goodwill.