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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 can come up.

To prevent an unexpected tax bill in the future, we recommend you also speak to a professional tax advisor about your specific situation.

You claim depreciation on some types of non-taxable (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 difference is treated as the seller’s income – they must repay previous depreciation deductions up to the amount of previous depreciation they claimed.

Buildings are treated a little differently. If you sell a building that you bought before the 2012 tax year, you may need to pay back some of the deprecation you previously claimed.

Depreciation

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.

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 50% taxable and 50% non-taxable, then the earn-out payments are allocated the same way. The seller would need to declare and pay tax on 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.

For example, a payment for an employee or contractor to leave a job or take another one.

So the employee or contractor must declare this income in their return and pay tax on it, while the payer can claim this cost as an expense in their return .

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 kind of income the seller had during the term of the financial arrangement, how much they’ve already declared in their tax returns, and what kind of 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.  

Zero-rated supplies

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 taxable and some will be non-taxable. You'll need to allocate the payment accordingly. 

Personal or business goodwill  

Payments for personal or business goodwill are generally non-taxable (capital).

For example, payments for goodwill are not declared as income or claimed as a business expense in your income tax return when they relate to:

  • a solicitor’s firm or a doctor’s practice
  • 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.

Generally, if you sell residential land (and any buildings on it) within 5 years of buying it, then the profit is taxable income. The same applies if you bought the land intending to resell it.

Land sales can also be taxable if either:

  • you run a business that deals in, develops, or subdivides land
  • you do not run this kind of business, but the land is sold within 10 years and at the time the land was bought you were associated with someone who ran this kind of land sales-related business.

What you need to know when you buy and sell residential property

Property and associated persons

Lease inducement and surrender payments are treated as a landlord’s income and can be claimed as an expense by a business tenant.

This includes consulting fees, brokerage and other sale-related costs. 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.

You can claim expenses in proportion to how much of the business sale involved taxable assets and property, and how much of it was non-taxable.

For example, if a sale was 30% taxable assets and 70% non-taxable assets, then you can claim 30% of your legal and other sale-related costs as an expense in your income tax return.

You can claim up to $10,000 of legal expenses in a tax year if they relate to producing taxable income. Beyond the $10,000 threshold, only part of the expenses are taxable or deductible (to the extent they relate to taxable assets).

Generally, you cannot claim depreciation on the following types of assets, and they are usually non-taxable (capital) when bought or sold.

  • Land, shares or other assets – when held for long-term investment.
  • Goodwill when related to a business or person (but not when related to a lease of business premises as part of a business sale or purchase).
  • Long-term supply contracts.

Payments for the following rights and any other rights to take natural resources from the land are generally taxable (included in your income tax return as income for the seller, or an allowable expense for the buyer):

  • patents
  • timber
  • minerals
  • 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 payee, while the payer can claim this cost as an expense in their 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.

Setting up an asset sale