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Business asset sales can involve a mixture of:

  • taxable (revenue) assets like trading stock, accounts receivable, personal property bought for resale, or patents
  • depreciable (capital) assets like plant or machinery
  • non-taxable (capital) assets like business 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. Typically, a higher proportion of:

  • taxable and depreciable assets will benefit the buyer as they can claim expenses and depreciation
  • non-taxable assets will benefit the seller as this reduces their taxable income.

Setting the sale price allocation

It’s important to set the allocation the same for both the buyer and the seller.

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

  • agree on how the sale price is allocated between taxable and non-taxable assets
  • allocate the sale price for all assets 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).

In the 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 talk early with a tax professional to make sure you get the details of your sale 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 sale made up of taxable and non-taxable assets.

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

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

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

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

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

Neither Jesse nor Connall will declare income or claim expenses for the $100,000 allocated to business goodwill.