Those thinking of buying or selling a business or property now will need to be cautious if the sale and purchase include mixed assets, for example, land and buildings that include taxable activity.
This is because sales (of business assets) are often subject to more than one tax treatment. These sales are sometimes referred to as ‘mixed supplies’. For example, a sale of commercial property will normally include depreciable buildings and fitout, and land held on capital account (non-taxable/non-deductible). The vendor and purchaser will agree a total price for the transaction, but may or may not allocate the price between the different assets. For tax purposes, however, the parties are usually required to make an allocation, to determine the vendor’s tax liability and the purchaser’s basis for deductions. This is referred to as a ‘purchase price allocation’.
Allocations must reflect market values for the various assets, but market value is a range rather than a single figure. Current law requires a purchaser of trading stock in a mixed supply to treat the trading stock as acquired for the same value as the vendor treats it as sold for. However, these rules do not contain a mechanism for the vendor’s allocation to be communicated to the purchaser, if the allocation is not stated in an agreement. Also, there is no explicit consistency requirement for depreciable property or financial arrangements. As a result, under prior law, there were many cases where the vendor and the purchaser in mixed supplies ascribed different market values to the same assets, often with the effect that their aggregate reported income was lower than if they had applied consistent valuations.
The purchase price allocations need to be made in the agreement before you sign. This consideration will not be discussed by your business broker or real estate agent. You need to consult with your lawyer prior to signing. Simply, include a Solicitor’s Approval clause thinking that will enable your lawyer to address and rectify any mistakes in this regard in NOT TRUE.
However, not all lawyers or accountants can advise you regarding this. Trying to save legal costs might just backfire.
Be wise and seek proper legal advice before signing a sale and purchase agreement.