Asset sales can be complicated since they often include different types of assets, each of which can be treated differently for tax purposes.
This page covers:
- different parts of a sale and how they are treated tax-wise
- potential issues that may be relevant.
We recommend you also speak to a tax professional about your specific situation, so the sale is treated correctly for tax purposes.
You can claim depreciation on some types of capital assets including:
- fixed assets like manufacturing machinery, vehicles or equipment
- intangible property with a fixed useful life, like the granting of a lease or the right to use trademarks, patents, or copyrights.
If these assets are sold above their tax book value, then the seller must include the excess depreciation deductions they claimed previously as income in their tax return.
The buyer can claim a depreciation deduction on the asset bought.
Buildings are treated a little differently as the depreciation rate for buildings has changed over time, and depends on whether the building is residential or non-residential. If you sell a building we recommend you tax seek advice on whether the depreciation claimed (or not claimed) was correct and whether there is any depreciation recovery income that you need to return.
These are when part of the purchase price is paid over time, depending on how the business performs.
Whether earn-out payments are taxable depends on the terms of agreement, so it’s worth getting professional tax advice.
In general, if the earn-out payments specifically relate to the sales and services provided and the performance of the business, then they’re taxable. The seller would need to declare income and the buyer can claim an expense each time a payment is made.
However, if the payments relate to the business’s assets and are really just paying off the purchase price over time, then it depends on how the sale price was allocated between taxable and non-taxable assets.
For example, if the sale price was allocated 50% taxable and 50% non-taxable, then the earn-out payments are allocated the same way. The seller would need to declare income of 50% of the earn-out payment, and the buyer could claim 50% of the payment as a business expense.
The seller can claim the cost of employee leave provisions (for example, paying out holiday pay) as an expense in the year they sell the business.
The buyer can usually claim any redundancy payments they make (for example, an employee who is not needed under the new owner) as an expense, unless the payment was part of the sale price for the business.
Generally, any part of an asset sale that relates to paying employees or independent contractors is taxable.
An exit inducement payment to an employee or contractor to leave their job or take another one may be agreed to be made and the cost of this paid by the buyer as part of the sale.
The employee or contractor must declare this income in their return and pay tax on it, while the buyer can claim this cost as an expense.
These are a type of transaction that has a lending component.
When a financial arrangement is sold, a wash-up calculation is needed to work out if there is any taxable income. This depends on what income the seller had during the term of the financial arrangement, how much they’ve already declared in their tax returns, and what expenses they’ve already claimed.
Financial arrangements can be complicated, so we recommend you speak to a professional tax advisor about your specific situation.
Interest and other financing costs related to the sale and purchase of a business can usually be claimed as an expense.
If a business is sold as a going concern (while still operating and making a profit), and if both buyer and seller are GST-registered, then the sale can be zero-rated (GST charged at 0%).
If this is done incorrectly, or if GST is charged or refunded when it should not have been, that can lead to a large tax bill for either side.
Most asset sales that include land and buildings should also be zero-rated for GST.
Goodwill may be either:
- personal or business goodwill (attached to a business and dependent upon the personal relationships between the proprietor and customers)
- local or site goodwill (attached to the location and premises).
Income tax depends on the type of goodwill sold. Working out what kind of goodwill is being sold usually involves a professional tax advisor.
If the sale involves both types of goodwill, then some parts of the payment will be taxable and some will be non-taxable. You'll need to allocate the payment accordingly.
Personal or business goodwill
Personal or business goodwill are generally non-taxable (capital) assets.
For example, payments for goodwill are not declared as income or claimed as a business expense when they relate to:
- the good reputation of a business
- an established client base
- trade names, trademarks and logos.
Local or site goodwill
Payments for goodwill are usually taxable when they relate to the physical premises the business operates from, or a lease or sub-lease.
This situation can come about when a seller grants a lease to the buyer (if they own the business premises), or as part of the asset sale sub-leases the premises (if they’re leasing it themselves) or assigns their lease to the buyer.
For example, payments for goodwill relating to the lease of licensed premises like hotels, restaurants or fast food outlets:
- are included as income in the seller's income tax return
- may be claimed as a business expense by the purchaser if they come under depreciation rules that relate to fixed life intangibles.
The profits from the sale of residential land (and any buildings on it) is generally taxable if you bought the land either:
- on or after 29 March 2018 and sold it within 5 years of buying it
- intending to resell it and do so at any time.
Other taxable land sales include:
- land bought for a business you or an associate run that deals in, develops, subdivides, or erects buildings on land
- land bought, regardless of whether or not the land was bought for the business, if you or an associate run a business that deals in, develops, subdivides, or erects buildings on land and the land is sold within 10 years.
Lease inducement and surrender payments are treated as a landlord’s income and can be claimed as an expense by the business tenant who makes the payment.
You can claim up to $10,000 of legal expenses in a tax year, including in relation to the sale of the business.
If legal fees exceed the $10,000 threshold and they are incurred in connection with valuing trading stock they may be deductible.
Other sale related costs include consulting and brokerage fees.
In general, these costs are non-taxable and cannot be claimed as an expense by the buyer as they relate to the long-term structure and holding of the business and are therefore capital in nature.
Payments for the following rights and any other rights to take natural resources from the land are generally taxable:
- removing crops from the land.
For tax purposes, this is any property that is not land. If it’s bought with the main intention of reselling it, then the profit will be treated as the seller’s taxable income. The same can also apply if your business usually trades in the kind of property that’s being sold.
It’s also possible that if you buy and develop an asset, intending to make money by reselling it (for example, restoring a car or a vintage guitar) then your profit may also be taxable income.
These assets are effectively trading stock, which means the seller is taxed on the income and the buyer can claim the cost as an expense.
An example of a restrictive covenant is when the buyer pays the seller not to open a similar business in the same area.
These payments are generally taxable to the seller, while the buyer can claim this cost as an expense in their income tax return.
Any part of the business sale price that relates to trading stock is taxable.
When trading stock is sold along with other assets, the total sale price must be allocated between the trading stock and other assets to reflect their separate market values.